Trade Data shows some signs of improvement in December…

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The trade data for the month of December 2016 was gratifying in that the exports were up by 15% on a sequential basis. Like the IIP numbers, the exports data also surprised on the upside because it was expected that the exports would slow down due to the impact of demonetization. However, demonetization did not seem to have any impact on exports. Even on a YOY basis the exports were higher by 5.72% and to an extent the exports were also helped by a weak rupee, which is now hovering around the 68/$ mark. On the exports front, the real boost came from petroleum exports which seemed to benefit on stronger crude oil prices after the OPEC supply quota meet on November 30th. Even on a country specific basis the export trends remain the same. While Indian exports to the US, China and the EU have fallen in percentage terms, India has seen its exports to Japan increasing, helped a consistently strong Japanese Yen.

What are the key takeaways from the trade numbers?

As the chart above suggests, the improvement in the trade deficit position in December is largely attributable to the sharp increase in exports. The sharp increase in exports was driven by oil exports which were helped by strong Brent Crude prices. However, with US shale beginning to get back to the market and the world already sitting on 9 billion barrels of stockpiles, the scope for further upsides in oil prices is limited. Exports for the first 9 months of the fiscal ended up at $199 billion, roughly the same level as the corresponding period in the previous fiscal year.

Imports have shown flat growth…

The good news could be that the imports have shown flat growth on a MOM basis. For the first 9 months of the current fiscal, the imports at $275 billion are almost 7.5% lower than the corresponding period last year. However, the danger signs are already visible on the oil front. Oil imports in value terms for the month of December are already 14.6% higher than the import value in December 2015. Non-oil imports, which constitute 77% of the total import basket for India, were actually down by 2.9% during the month of December. This can be largely attributed to lower gold imports in December, which is a good trend since gold imports had gone up sharply in the month of November. The higher levels of compliance requirements and the IT department coming down heavily on gold traders have dampened the demand for gold in India. That probably explains why gold imports may continue to be tepid in the coming months.

Understanding the trade in services…

While India has traditionally run a deficit in its merchandise trade, it has run a surplus in services trade. For the month of November 2016, services exports came in at $13.34 billion while services imports came in at $8.33 billion. That leaves a services trade surplus of nearly $5 billion for the month of December 2016. We have already seen that on the merchandise front India had reported a merchandise trade deficit of $10.4 billion. Combining the merchandise trade deficit and the services trade surplus, India ends the month of December 2016 with a net trade deficit of $5.4 billion. Of course, the services trade data is reported with a lag of one month, but it is broadly indicative of the trend. The worry on the services front is that while the services exports for the month of December have grown at 1.72%, the service imports have grown at 8.37%. Of course, this weak growth in service exports may be attributed to the demonetization which also led to the PMI-Services languishing at a sub-expansion level of 46.7.

Key points on trade data going ahead…

Based on the December 2016 trade data, there are 4 key points to be remembered…

With the price of crude oil sustaining at higher levels and the OPEC keen on influencing supply, there is a serious upside risk to the import bill. The Ministry of Commerce needs to be cognizant of this risk.

The services exports, which were largely driven by software exports, have been languishing due to tepid global demand for Indian IT services. As Indian IT adjusts itself to the post-digital era, India needs to look at alternatives to boost its services exports so that the cushion of a surplus on the services account is not lost.

In terms of forex reserve coverage, the current forex chest of $370 billion is sufficient to cover nearly 13 months of imports. That is a very comfortable scenario to have and puts the Indian economy more at par with the other BRICS economies. This also ensures that the INR does not come under pressure in the currency markets.

December may have been a tepid month for gold imports but that remains the big risk for the Indian trade book. Burning precious foreign exchange to import an unproductive like gold does not make economic sense. The government needs to have back-up plans, either in the form of gold demonetization or penalizing gold imports.

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